A) Calculate the price of a bond with 20 years remaining until it is due. The coupon rate is 7%, par value is $1000. The required return on debt is 6%.
PV(6%, 20,-$70, -$1000)
Bond price= $1,114.70
B) Now assume a year has passed. Calculate the price of the bond now with 19 years remaining until it is due. Also assume that the required return on debt has fallen to 4%
PV(4%, 19, -$70, -$1000)
Bond price= $1,394.02.
C) What is the capital gain (both in $ and in %) purchasing the bond in Question A and selling at the price you calculated in (B)?
D) What is the coupon yield over the period during the period in %? What is it in $?
E) What was the total return from holding for a year (both $ and %)?
F) Now assume the required return on debt remained at 6%. Repeat B-E assuming that the required return on debt remained at 6%.